The question is whether this should simply be a modification to the current subscription system (i.e. make it notify subscribed moderators when a non-approved post is posted, and everyone else when the post is approved) or to add a new option that notifies anyone with post approval moderator permissions in a given forum when a post is posted there.

I would personally go for the latter, as I don't think moderators should be able to choose which forums for which they should be notified; if they are moderators of a given forum, they should be notified.
-------------

By the way, I want to point out that there is fairly recent progress on a feature to add moderator action alerts in the board header (adapted from this MOD) that is related in that it increases awareness of items requiring a moderator's attention, though it does not address this specific email notification issue.

I do custom MODs. PM for a quote!View My: MODs | PortfolioPlease do NOT contact for support via PM or email.
Remember, the enemy's gate is down.

For this to work I had also to set email package size in email settings to 0.

This is a dumb starting point, a notification of all posts, without any reasonable content in the email. But now I'm free of watching my almost abandoned forum. The next step would be moving this to a place where approval is needed.

This is now live in an individual's own notification settings. From what I've seen if they are a moderator then they will have a section for Moderator Notifications. Email appears to be off by default, so those moderators will just have to log in and change that setting to be checked.